Do European hedge fund managers time market liquidity?

Abstract

We propose two approaches to examine whether European hedge fund managers can time market liquidity. Using a sample of 1616 European hedge funds, we find evidence of liquidity-timing. More importantly, this ability adds economic value to investors. Thus, it represents valuable managerial skill and a major source of European hedge funds’ performance. Also we show that the majority of these funds demonstrate liquidity-timing ability especially during liquidity crisis. Finally, it emerged that our main evidence of liquidity-timing remains significant after controlling for market-timing and volatility-timing.